Monday, November 20, 2006

The market fell today, which was a welcome change, particularly since it looked early on that we'd have yet another record high on our hands. The market "felt" different today, as there was no late-day rush by the bulls to push it upward. The bears were (just a tiny little bit) in control for a change.

The $VIX, the market's measure of volatility (and, indirectly, complacency) fell to an unheard-of low beneath 10. We are now in single digit territory, which means that puts have a historically very modest time premium. Buying puts today is a relatively inexpensive exercise, although obviously the intrinsic value still plays a big role here! But you can see just how sharply the VIX has plunged.

There is a review of this blog coming out in the December Technical Analysis of Stocks and Commodities magazine. I got an advance copy, and it's a very nice review. One of the things it points out is how this blog is really meat & potatoes, not straying into rhetoric but focusing on charts.

Well, let me defy that a bit by delving into a bit of a speech. Something that has been on my mind lately has been the growing skewed nature of the distribution of wealth in the U.S. It will come as a surprise to no one that the super-rich as hoarding more and more of the pie.

Now this may sound like an introduction from some left-wing socialist. I assure you I'm not. My capitalist roots run deep, and my political philosophy is a libertarian one. However.......I am sensing an extreme in a cycle here which, over a period of decades, is bound to have major social consequences.

I grew up during the 70s and 80s. In the 70s, my economic understanding of the world was that, yes, there were rich people. Even a few billionaires. The vast majority of people worked hard for their middle-class wage. There were some highly paid executives that were in the six-figure range. The playing field was more or less level, but grotesque differences between the middle and upper classes were not altogether apparent. Or at least they weren't flouted.

Things have changed. The sea change wasn't the "greed decade" of the 1980s. The real difference back in the early 90s, when tax rules regarding stock options and executive compensation changed. The most highly paid weren't six-figure salaries anymore, or even multi-million dollar salaries. It pushed into the eight figures. And the nine figures. In a few rare cases (hedge fund managers), even annual salaries in excess of a billion dollars were reported.

I found a graph showing the distribution of wealth in the U.S. in the various strata. This is a somewhat outdated graph, but it's pretty close. As you can see, the top 1% has about a third of the wealth.

What does this have to do with the financial markets? We saw in the March 2000-October 2002 bear market how many scapegoats were dragged out. People had a blood lust about seeing companies collapse (hence the one-time popularity of f*ckedcompany.com), executives hauled away to prison (Enron, Adelphia, Worldcom, Healthsouth), and investment bankers fined or barred (Mary Meeker, Henry Blodgett). The bear market was overly relatively quickly. Had it dragged on for another year or two, there would have been more scapegoats, more congressional hearings, and the like.

What's going to happen to our social and government scene if another downturn takes place? The Democrats are in charge now. What if America - - everyone, not just the superrich - - begins to experience a fall from grace? What if employment rises, interest rates move up, the stock market moves down, or any combination of these?

I imagine the envy of the superrich will morph into contempt. And we're going to see the same cycle again, only larger. The seeds are being sown for this kind of populist revolt. America is too centrist and capitalist a nation for it to go anywhere extreme. But the soil is pretty fertile for the masses to want some kind of reversal of national fortunes, be it in the form of confiscatory taxes or some other animal.

End of speech. Just wanted to share those musings. Now back to the meat and potatoes.

The Russell 2000 remains my favorite index candidate for shorting. I bought a block of puts today (January expiration) on this, with a stop at any price above 795. It's a relatively low risk trade.

The S and P 500 ($SPX), shown in candlestick form here, had a perfect doji pattern today. This is a statement of uncertainty. The market finally took a pause, in spite of a lot of bullish news about massive mergers, both real and contemplated.

The Dow Transports continues to be in a rather bearish pattern. You can plainly see the series of lower lows and lower highs illustrated here, along with a nice complement of Fib fans beneath the current price levels.

Gold shot higher early today, but it weakened throughout and actually closed down (when I say 'gold', I am typically speaking of the $XAU index, not the commodity gold itself). I remain long the puts on this index.

FCX, the purchaser of PD (whose puts I got blown out of this morning at the pathetic price of a nickel each!) sank on the day. I continue to like this chart, in spite of the mauling I took with PD!

Here is Frontier Oil, which appears to be forming a head and shoulders pattern. I'll say again that patterns in formation aren't patterns at all - - merely potential ones. Those among you more comfortable with risk may consider this as a short.

Finally, another look at Lehman Brothers (LEH). Same as before - a stop price not too far from the current price, and plenty of room to fall.

Actually the red-commies were the ones doing the wealth distribution. And those that distributed kept far more than their fair share. Democracy and capitalism may not be the best form of gov't, but its the best the worlds seen yet.

Thanks for pointing out this massive inequality. It is staggering! On the same note, do you believe there are people out there paying Paris Hilton $500,000 a pop for appearing at some event? It's absolutely sickening how awful human nature can be. While we're on this dis-heartening topic, there are still over a billion + people on this earth that have no access to clean/safe drinking water. Maybe we can remember this fact next time we plump some $$ down for the next movie or sporting event. It's absurd the amount of money someone can make by throwing a ball into a basket, or hitting some small ball into a whole with a fucked up stick! It's a reflection on all of us --- we're sick bastards for sustaining a system that is rotten to it's core! I can go on, but we all get the point. Oh sorry, one more ... the US military spends hundreds of millions of dollars on fighter jets whose sole job is to destro life. All against an enemy that can't even properly feed it's population. Maybe these jets could drop some clean drinking water???

P.S. the new U2/Green Day video makes a perfect example of this.

Also, the US is a big bully in this world, picking fights against countries that have smaller GDP's than a mid-size US city. Change needs to happen at home, but the US populace is without a backbone ... we are morally bankrupt. Money is our God.

I'm working hard to get into the top 1% so maybe you can help me with a question. Looking at LEH I see a double top with a pull back but it's also a cup with a handle. I'm seeing this in many of the charts out there and don't know how to play it. Thanks man.

From your description of your many Put/Short positions, you surely are in the lower upper class category. Maybe you are getting envious of the upper upper class people. You want the super rich to crash down, so that you can be on top. That's the real reason that you are praying for a super bear market.

PB good post, agree 100%, the money that paris hilton makes just makes me sick, i cant stand her, who would pay this girl $500,000 is beyond me....did you see the interview with donald trump and donny deucth( spelling). Trump priased Paris, i was like WTF....the world we live in isnt fair...DId you see the deal the cubs made for soriano, 5th highest ever, 130+ million....come onnnnnnnnnn....

as for the drinking water...

buy PHO, in 20 years I think this stock will be a great investment vehicle for this major industry...

Did you know that during the Great Depression there was a canidate for President and that one of his platforms was that no one person would be allowed to accumuate over 15 million dollars in wealth. Whats that in today's money like 500 million.

I think we will see these ideas cycle through again. Hopefully this time they stick

People should certianly be allowed to accumulate as much money as they can... there is no other way to "fairly" distribute wealth. The scary thing is you only need to make some $50k per year to get into the top 20%. I live in NJ and you better make over $100k per year to cling onto the "middle class".

It all comes back to inflation... the more money we pump out to keep the party going, the more of it there will be for the rich and motivated to capture. Stop the insane inflation of the money supply and the bottom 80% will stop falling behind by standing still. In other words... bring back the Constitution.

Is this a Trading Blog or a "Tongue Wagging" grafitti wall? There is money to be made - quit moaning and groaning and get on with business!!! It is ALL about Technicals - Price Action/Volume is what determines the Day, Week, Month, Quarter, Year...... Fundamentals is what the bankers and valuation monkeys worry over. We are NOT buying them - we are only trading them!!!

Have a Happy Thanksgiving - we are having Bear at our house this year!!! Might be Beef for Christmas? Who cares? Trade them the way they move! Hmmmmm! Yummy!

Great musings Tim, thoughtfull article and i like the wealth distribution graph, yet another good hard to find graph. Awesome job,

By the way I will be going Short on the SP500 within the next couple days, my indicators see negative divergence and they tell me what to do, I keep it simple, The more I follow my indicators, usually the more money I make, its a pretty simple formula...

I really did not think I would be entering a SHORT position going into X-mas, but that is what will happen.

Anyone here have a problem with Bill Gates being worth 50 Bil ? Or Warren Buffet being worth 40 Bil ? Hope not . They did something amazing to justify their wealth .Corporate crooks asids,99% of us just don't have the smarts to make the really BIG bucks . Quit crying,it was the same way 120 years ago when Rockefeller and JP Morgan and a few others controlled everything. Actually it was even worse for the little guy then.So quit trying to be John Maynard Keynes and see if you can invent the next I-POD.

7:01 am --- I hope I can personally thank Bill Gates for giving us a shitty O/S ... if NASA were to use Mister softies programs, we wld have never gotten to space. We are being sold an inferior product. As for Warren Buffet, he did nothing wrong, but just imagine how much better the world would be for everyone if instead of pursuing profit just for profit sake, we actually showed a little bit more care towards others and the environment. This might come as a surprise to many of you in the US, but the world does not belong to us ... we are just temporary caretakers. And judging by the amount of degredation we have been doing these last 100 years, humanity is slowly being sucked into a black hole that we have ourselves produced.

there was an article in the WSJ not too long ago that predicted the envy of the 'lower upper' class against the 'upper-upper' class. It looks like they were bang on. Someone w/ two houses in So. Cal should have it made, yet you seem to yearn for more. Please count your blessings, and thank God everyday that you do not have to look through a pile of garbage for your next meal! This actually goes for any of us that are reading this! The upper-upper class is rotten to the core. If it's anyone on this planet that should be 'kicked-off the island' it is them! They could do so much more to end a lot of misery on earth, but what do they choose to do? Buy more yachts and have their cell-phones gold-plated. It's sickening and I just wish people actually started to put up a fight against this de-humanizing consumption machine the world has become.

I'm all for being a humantitarian.I happen to have had a fairly consistent and happy experience with my several versions of WINDOWS over the past 15 yrs.So I'm not gonna "DIS" Gates. However,I cannot stand Suzie O. She's as self serving and greedy as anybody out there trying to get you to buy her books and CD's so she can be wealthy herself just to tell you to cut up your credit cards. Give me a break. How about a medical doctor who gives up a multi-million dollar medical pracitice and goes over to a third world country and 'tries' to save lives for little or no money. And we never see these people on FOX or CNBC.Suzy needs to shut her mouth and go become a missionary.Oh, and sorry for the ethics rants folks,but it fills the time until the next great trading forecast.Anybody got one ?

For the record, I received this email:----------------I work with Frank Quattrone and wanted to point out an inaccuracy in your blog posting on 11-20. It mentions investment bankers “fined or barred” and includes Frank Quattrrone’s name. This is incorrect. The charges brought by NASD against Mr. Quattrone either have been overturned or dropped. There is no fine or bar in any final judgment which of course are the only judgments that count. Indeed, Mr. Quattrone is free to resume his career if he so chooses. Similarly, the charges brought by federal prosecutors in NY will be dropped in less than a year based on an agreement reached this past August.

We would appreciate it if you could post a correction so that the public record is accurate. I can be reached via email or phone (below) if you would like to discuss this further.----------------

I have deleted Frank Quattrone's name and re-published my entry. Thanks for the clarification.

can any true expert tell me what is going on with this market, the first month i was like wow, second up month i was like this is incredible but after weeks and weeks and weeks and weeks without any kind of pullback can someone tell me what is happening....Markets are at intraday highs as I write this AGAIN....

trader 2006 --- this market is setting itself up for a fall! Do not believe this undervalued crap! It's all BS! We'll get another 100 points or so to the upside, but it's not a given.

I have taken a half position in a mkt drop, will take the other half once we get this expected 'pop'.

Everyone and their mother had been expecting a big drop all year. It never came, it will! If not in the next few weeks, then by March. Until then we might be treading water. It's best to sit on cash, it's hard to force trades at these levels, once the mkt breaks, jump-on!

Can you say Stubborn Bears? Please do not tell us that there is nothing to trade? I have been busy for months now. Longs and shorts. Granted mostly Long (Calls) plays but enough shorts and Puts to stay in practice.

your comments about the rich getting richer are all well and good. but, what did the people who are not rich contribute to society, do they have talent, do they have education. I am not one of those in the rich class. In a democracy, the people who have greater talent will always be rich. kobe can do something no one else can do. similarly david letterman, john chambers and the list goes on and on.

hey Mr. 11:12am ... and what does kobe or letterman contribute to society?? Seeing a black man jump and run around with a ball doesn't seem to me to be worth millions! A $100K would be enough for these clowns! And letterman? He hasn't told a funny joke in about 10 years! There is just too much fukin' money in the US, and most of it is not being put to a good and just use! If there were no starving children in the world, maybe I could see a reason for all this shit, but until that happens, each of us has a moral duty to make this world a better place for everyone, not just money for money's sake!

I don't know how to explain it very well. but if it was not cool to see kobe jump and run around, the market forces will take care of it and he would be paid only 100K, but millions of people want to watch him jump and run around, that is why he is paid millions. extreme talent deserves extreme compensation. If a new 22 year old hedgefund manager out of MIT comes with with a formula to make 100% winning trades, what would he be paid?

thanks for explaining the inner working of 'the market' --- the point is/was that our value system is totally misplaced. I guess according to you and the market, it's better to have freaks jumping around with balls, than feeding the world's poor. It's exactly attitudes like yours that produce such inequalities in life.

Anyone who asks how a star NBA player makes mega-millions in this day has gotta be one ignorant SOB. It's the same reason Jack Nicholson and Tom Cruise make 40 Mil on the front end, and a % of the back end of their movies.It's why Larry King and Howard Stern are making mega millions a -year "just talking " Same reason Jack Nicholas and Tiger Woods make millions"just endorsing". It's called creating a REVENUE STREAM.And if your one of the lucky few who can do that by being involved in something, then you get a piece of the action.And there is nothing more AMERICAN than that .Or more accuratly,more Global than that.It's the way the world works,thank GOD !!

My comment about billionaires was supposed to be a joke (like "some of my best friends are _______"). I am only well acquainted with one billionaire, and I think he's cool because his car is a totally fugly Vanagon. Bless him.

trader ... again, you shd be at Harvard teaching a course on applied physics! You're one smart dude! If you see nothing wrong with athletes or actors making huge sums of money, while the rest of humanity scrapes by, then please do the world a favour and go to Iraq with a backpack labelled BOMB!

I have no idea of course what all you do earn income for yourself. My take on anyone ,including yourself, is if you are invovlved with a product,or anything that is producing a certain revenue, then you are entitled to get a good percentage of the profits from that venture.Everytime you turn on the TV to watch ANTHING,or rent a movie,or buy a book,buy Wrigley chewing gum,(What do think the Wrigley heirs make for doing absolutely nothing ?), you are contributing to that system. So you 12:31, may have my bomb filled backpack, go to Iraq, and never buy,read,or pay to view anything again. Which by the way ,is exactly what Iraq would like to see happen.

trader, pls stop and think for a moment. Yes, everyone needs to make a decent living, but Tim's whole post was about the enormous gap between the rich and the poor. If you see nothing wrong with the current picture, then either a) you have no heart or b) you're a rich SOB yourself that cares for no one but his wallet.

Please go to a village in Africa and explain to the starving kids why it really is a better system that gives certain people millions upon millions of dollars, while others have nothing to eat.

The government and the federal reserve should create a new currency and distribute 100k to everyone and therefore make the billionaires worth the same as everyone. Lets see how well this goes and how those rich bastards attitudes change.

2:57pm --- good idea, but I just wonder how soon many would slip down the slippery slope of stupidity. Many would gamble it away etc. But at least we would have given it a chance, and could really say that at one point in time, everyone was equal (at least monetarily) Anyways, it is something I think shd definitely be tried at least once during human existence. Now that would be a true democracy!

So... Capitalism and democracy is a system in which economic goods, property, and funds are distributed eqitably by the "state". And communism is an economic system in which private decision dictates free market value for goods & services in relation to supply and demand.

Tim Knight founded Prophet.net, considered by Forbes and Barrons to be the #1 technical analysis site (sold in early 2005 to INVESTools, where he is the SVP of Technology now). Tim has been trading actively since 1987 and focuses mostly on option positions. He is a dyed-in-the-wool technician, leaning heavily on marked-up charts for his analysis. The contents of this blog are NOT to be considered investment advice, and you should know Tim may or may not have positions in the securities mentioned here.